First Experience with Blockchain Law in Malta

The ubiq­ui­tous term ‘Blockchain’ has been often used in a non­cha­lant man­ner yet clos­er scruti­ny is required to dis­sem­i­nate what exact­ly is meant by: ‘Blockchain Law’. To be both pre­cise and metic­u­lous at the same time, there is no such thing as a con­spic­u­ous­ly con­ceived statu­to­ry Blockchain frame­work. Instead, there are a few laws and sup­port­ing doc­u­men­ta­tion which aim to pro­vide some form of legal cer­tain­ty to all ‘Blockchain’ enthu­si­asts.

‘Understanding Blockchain’

To fur­ther under­stand what is meant by: ‘Blockchain Law’, we need to ini­tial­ly attempt to under­stand the term: ‘Blockchain’. Investo­pe­dia for exam­ple remarks that: ‘Blockchain is lit­er­al­ly just a chain of blocks, but not in the tra­di­tion­al sense of those words. When we say the words “block” and “chain” in this con­text, we are talk­ing about dig­i­tal infor­ma­tion (the “block”) stored in a pub­lic data­base (the “chain”). More­over, it is stat­ed that: ‘Bit­coin is based on a dis­trib­uted ledger or rather a spe­cif­ic kind of dis­trib­uted ledger: ‘a Blockchain’.

There­fore, for all intents and pur­pos­es, when we refer to: ‘Blockchain’ we are refer­ring to the under­ly­ing ‘Tech­nol­o­gy’ that is nowa­days already seen as an inte­gral part of the ‘dig­i­tal soci­ety’. As Mal­ta is already apt­ly termed: ‘Blockchain Island’, this tiny juris­dic­tion in the mid­dle of the Mediter­ranean has already been at the fore­front of inno­va­tion with the recent pro­mul­ga­tion of the ‘Vir­tu­al Finan­cial Assets Act, Cap. 590’, ‘Mal­ta Dig­i­tal Inno­va­tion Author­i­ty Act, Cap. 591’ and the ‘Inno­v­a­tive Tech­nol­o­gy Arrange­ments and Ser­vices Act, Cap. 592’ of the Laws of Mal­ta. Col­lo­qui­al­ly speak­ing, these three pieces of leg­is­la­tion have already been referred to as: ‘Blockchain Laws’.

It is fair to say that giv­en its rel­a­tive infan­cy, ‘Blockchain Law’ as such is still not ful­ly oper­a­tive and/or func­tion­al. So much so, that a prop­er analy­sis of Blockchain Law should ide­al­ly be con­duct­ed with­in a peri­od of five to ten years from its actu­al pro­mul­ga­tion. Nev­er­the­less, it is worth men­tion­ing the most salient fea­tures and com­po­nents of this new reg­u­la­tion.

Virtual Financial Assets Act

When analysing the VFA [Vir­tu­al Finan­cial Asset] Frame­work, from a prac­ti­cal per­spec­tive, the start­ing point cer­tain­ly has to be the Vir­tu­al Finan­cial Assets Act, Cap. 590 of the Laws of Mal­ta. Inno­v­a­tive yet slight­ly rigid, astute­ly writ­ten yet rel­a­tive­ly com­plex, this Act essen­tial­ly espous­es the doc­trine of ‘legal cer­tain­ty’; that is, estab­lish­ing a struc­tured and spe­cif­ic frame­work to ensure that a com­pre­hen­sive leg­is­la­tion is cre­at­ed in order to ulti­mate­ly guar­an­tee ‘investor pro­tec­tion’ and the rep­u­ta­tion of Blockchain island.

The Act main­ly deals with (i) Ini­tial VFA Offer­ings – that is main­ly, the estab­lish­ment and oper­a­tion of an ICO [Ini­tial Coin Offer­ing], (ii) gen­er­al Licens­ing require­ments for per­sons will­ing to apply for a VFA Ser­vice, (iii) the Board of Admin­is­tra­tion and its oblig­a­tions, the (iv) pre­ven­tion of mar­ket abuse, (v) Reg­u­la­to­ry and Inves­ti­ga­to­ry Pow­ers, (vi) the Duty of Audi­tors and (vii) Appeals, Reme­dies, Sanc­tions and Con­fi­den­tial­i­ty pro­vi­sions.

Articles 7 and 14

The most impor­tant ele­ments of the Act per­tain to Arti­cles 7 (i.e. the require­ment for the issuer to ‘appoint and have at all times in place, a VFA Agent who shall be reg­is­tered with the MFSA) and 14 (i.e. that the appli­ca­tion for a license must also be made sole­ly through the VFA Agent]. There have so far been 36 appli­ca­tions for Issuers of VFA Offer­ings and 41 appli­ca­tions by prospec­tive VFA Agents. In terms of Arti­cle 14, there have so far been 182 appli­ca­tions from ser­vice providers.

The First and Second Schedules

Expe­ri­ence has shown that mas­tery of the First and Sec­ond Sched­ules of the VFA Act is para­mount for a good under­stand­ing of the sub­ject. In fact, this was empha­sised by the MFSA through­out the approved-cours­es for the VFA Agents. The First Sched­ule deals with gen­er­al prin­ci­ples that should be found with­in any VFA Offer­ing Whitepa­per. This exhaus­tive list has already been applied by a num­ber of issuers and its aim is to gen­er­al­ly ensure that prospec­tive investors are aware of the all the risks asso­ci­at­ed with crowd­fund­ing ini­tia­tives.

The Sec­ond Sched­ule con­tains a list of VFA Ser­vices and from a prac­ti­cal per­spec­tive, these are 1) Recep­tion and Trans­mis­sion of Orders 2) Exe­cu­tion of orders on behalf of oth­er per­son 3) Deal­ing on own account 4) Port­fo­lio Man­age­ment 5) Cus­to­di­an and Nom­i­nee Ser­vices 6) Invest­ment Advice 7) Plac­ing of VFAs and 8) The oper­a­tion of a VFA Exchange.

It goes with­out say­ing that giv­en the cur­rent and obvi­ous ‘slow­ing-down’ of the ICO Mar­ket, VFA Ser­vices will cer­tain­ly play a more cru­cial role in the months to fol­low.

Subsidiary Legislation

Sub­sidiary Leg­is­la­tion 590.01 [The Vir­tu­al Finan­cial Assets Reg­u­la­tions, 2018], pri­mar­i­ly deals with four main fea­tures 1) Licens­ing Exemp­tions 2) Fees 3) The Hold­ing and Con­trol of Assets and 4) Admin­is­tra­tive Penal­ties and Appeals. This sub­sidiary leg­is­la­tion makes ref­er­ence to the four class­es of licens­es and also stip­u­lates that the hold­ing and con­trol­ling of client assets forms a dis­tinct pat­ri­mo­ny in so far as lia­bil­i­ty is con­cerned. To also note that the MFSA has pub­lished two Rule­books [Chap­ter 1- VFA Agents, Chap­ter 2- Issuers of VFAs at the time of writ­ing] which should also be read and analysed as well as numer­ous Guid­ance Notes, Con­sul­ta­tion Papers & Feed­back Reports.

The MDIA Act

The ‘Mal­ta Dig­i­tal Inno­va­tion Author­i­ty Act’ pri­mar­i­ly estab­lish­es this organ­i­sa­tion and enshrines the guid­ing prin­ci­ples of this Author­i­ty, that are main­ly: the pro­mo­tion and devel­op­ment of the inno­v­a­tive tech­nol­o­gy sec­tor and the devel­op­ment of Mal­ta as a cen­tre of excel­lence for inno­v­a­tive tech­nol­o­gy.

More­over, the Act also men­tions the ‘Func­tions’ and ‘Con­duct of Affairs’ of the Author­i­ty and it is spec­i­fied that the MDIA is a ‘body cor­po­rate hav­ing dis­tinct legal per­son­al­i­ty with legal and judi­cial rep­re­sen­ta­tion vest­ed in the Chair­man’. In this con­nec­tion, the Board is tasked with Reg­u­la­to­ry pow­ers, enforce­ment and sanc­tions. An inter­est­ing con­cept is the encour­age­ment of ‘co-ordi­na­tion with oth­er nation­al com­pe­tent author­i­ties’ includ­ing the MFSA, Mal­ta Gam­ing Author­i­ty, Mal­ta Infor­ma­tion Tech­nol­o­gy Agency, Mal­ta Com­pe­ti­tion and Con­sumer Affairs Author­i­ty and the Mal­ta Sta­tis­tics Author­i­ty.

The ITAS Act

The much-antic­i­pat­ed ‘Inno­v­a­tive Tech­nol­o­gy Arrange­ments and Ser­vices Act’ pri­mar­i­ly caters for the vol­un­tary appli­ca­tion for cer­ti­fi­ca­tion of DLT [Dis­trib­uted Ledger Tech­nol­o­gy] and Smart Con­tracts. More impor­tant­ly, it also pro­vides a struc­ture for the reg­is­tra­tion of Sys­tem Audi­tors and Tech­ni­cal Admin­is­tra­tors.

This Act also con­tains the reg­is­tra­tion require­ments for providers of Inno­v­a­tive Tech­nol­o­gy Ser­vices. The Reg­is­tra­tion process focus­es on the ser­vice provider being fit and prop­er, qual­i­fi­ca­tions and expe­ri­ence of the ser­vice provider, the tech­ni­cal resources or third-par­ty sup­port of the ser­vice provider etc…The most salient arti­cle in the ITAS is undoubt­ed­ly Arti­cle 8 which deals with the ‘cer­ti­fi­ca­tion’ of any prospec­tive ITAS. To also note that there are sev­er­al Guide­lines which have been issued by the MDIA which cer­tain­ly deserve a thor­ough read­ing by all and sundry.

Conclusion

As pre­vi­ous­ly stat­ed, prac­ti­cal and hands-on appli­ca­tion of ‘Blockchain Laws’ is still very much a nov­el con­cept. How­ev­er, prac­ti­tion­ers and prospec­tive clients would do well to famil­iarise them­selves with the inher­ent feel of the over­all leg­is­la­tion – which one can sur­mise will cer­tain­ly play a cru­cial rule in ensur­ing that Blockchain Island thrives on its well-found­ed rep­u­ta­tion of ‘inno­va­tion’ & ‘tech­nol­o­gy.’

Dis­claimer*

The above-men­tioned arti­cle is sim­ply based on inde­pen­dent research car­ried out by Dr. Wern­er and Part­ner and can­not con­sti­tute any form of legal advice. If you would like to meet with up with any of our rep­re­sen­ta­tives to seek fur­ther infor­ma­tion, please con­tact us for an appoint­ment.

Dr. Michael Calle­ja, born on the 07.01.1988, stud­ied law at the Uni­ver­si­ty of Mal­ta from 2006 till 2012. He grad­u­at­ed Bach­e­lor of Laws & Euro­pean Stud­ies in 2009 with a Sec­ond Class Upper Degree and grad­u­at­ed Notary Pub­lic in 2010. He suc­cess­ful­ly defend­ed his the­sis enti­tled: ‘Beyond the Bosman Rul­ing: Con­trac­tu­al Dis­putes in Foot­ball and the Spe­cif­ic Nature of Sport in the Euro­pean Union’ in 2012 and obtained his Doc­tor of Laws (LL.D) accord­ing­ly.